JLL
Dirk Wichner - JLL
‘No other retail segment demonstrates the shift in consumer behaviour in Germany as strongly as the food/gastronomy segment does,’ said Dirk Wichner, head of retail leasing at JLL Germany.
Food and gastronomy take-up has increased six fold over the past 10 years as business kicks into a new gear, according to a new study by JLL, ‘Changing food retail: from mom-and-pop stores to e-business’.
In a sign of just how much the sector has changed, new take-up for food retailers/gastronomy in Germany totaled 100,100 sqm in 2016, compared to just 17,900 sqm in 2006. Now, the segment accounts for 20% of the overall letting market, compared to just 8.3% in 2006.
‘The long-term analysis shows just how much the letting volume has grown,’ said Helge Scheunemann, head of research at JLL Germany. ‘This is reflected by consumer behaviour in Germany; people now spend 22% more on consumption than they did 10 years ago.’
However, while food retailers continue to account for 47% of the food/gastronomy market in terms of letting space, the nature of the space they’re taking has changed, Sandra Ludwig, head of retail investment at JLL in Germany, told REFIRE: ‘A few years ago, a lot of food retailers took space outside the city centre,’ she said. ‘Now, they are moving back in because they see that there is more money to be made there because people work and live there. Food is something that we always need. We are also seeing that younger people, in particular, like going out to eat – it’s become more experience driven.’
As a result, chain restaurants now account for 30% of the market, up from 15% in 2006. ‘We’re not just talking about fast food restaurants but also about chains such as Vapiano,’ Ludwig said. ‘Coffee shops/cafés now represents a much smaller part of the total because they have reached market saturation. A lot of traditional retailers, such as textile shops, are having problems and giving up space, which creates more opportunities for food retailers.’
Restaurants and snack stands have also soared to 16%, up from just 3%. Other groups, notably bakeries, have fared less well, falling to just 2%, down from 13% in 2006. It is a similar story for coffee shops, which now account for just 3%, down from a sizeable 20% in 2006.
‘No other retail segment demonstrates the shift in consumer behaviour in Germany as strongly as the food/gastronomy segment does,’ said Dirk Wichner, head of retail leasing at JLL Germany. ‘Big shopping bags are no longer enough when it comes to an enjoyable shopping spree – it’s more about the experience, the enjoyment factor. That explains why gastronomy has triumphed, whereas for textile shops, for example, the space must always be calculated more tightly.’
And as the food landscape changes, so do the types of shops on offer. The number of small food retailers has fallen by half in the last 10 years to 8,750. Supermarkets (10,900) and discounters (16,054) have increased slightly. Overall, the number of food-related stores has fallen to 37,682 from 39,155.
However, the boom in e-commerce is unlikely to have a major impact on Germany’s food market. Around 10% of all goods are bought online in Germany, although only 1% of food shopping is done online, an increase of a meagre 0.6% in the last five years. This is far lower than in the UK, where 6.9% of food shopping is done online or in France, at 5.3%.
‘Even if online retailers make new offers, food shopping for the majority of consumers in Germany will be bought from actual stores,’ said Ludwig. ‘For investors, this means that food retailers are important anchor tenants, as both a source of frequent visits and as a sales driver. That increases the value and attractiveness of those properties.’
2018 will be year of ‘thinking outside the box’
As 2018 gets underway, one thing is clear: demand for real estate in Germany is radically outpacing supply. For investors with deep pockets, the problem is exacerbated because there simply aren’t enough traditional assets in which to invest. As core assets become harder and harder to source, canny investors are turning to new income streams to boost their portfolios.
New hybrids shake up market
The disconnect between current pricing and risk is propelling Germany’s real estate market in a new direction as investors increasingly seek out more diverse opportunities.
‘The demand for real estate is still very high but the current pricing of real estate doesn´t always reflect existing risk,’ Olaf Janßen, head of research at Union Investment Real Estate, told REFIRE.
Hence the need to find new ways in which to invest, says Dr. Esfandiar Khorrami, a partner at law firm Bottermann Khorrami. Budget food retailer Aldi is shaking up the residential space with plans to build apartments above its existing stores, creating a new food retail/resi hybrid, much like Tesco is doing in the UK. (Sainsbury and Morrisons are also building on-site housing).
Aldi is planning to build more than 2,000 rental apartments above its stores in Berlin. The mixed-use developments will be rolled out in at least 30 locations across the city. First up will be 200 apartments in the hipster district of Neukölln; and Lichtenberg, home to the former headquarters of the Stasi. Jörg Michalek, managing director of Aldi, has described the developments as a ‘future-oriented solution’. The Berlin apartments are due to be ready by mid-2019 and will be rented for between €6.5 and €10 per sqm.
Understandably, the new schemes are already attracting investor interest: ‘We’d be very interested in that sort of product,’ Florian Mundt, managing partner of open-ended fund manager Deutsche Investment, told REFIRE. ‘Everyone shops at Aldi and Aldi is always looking to find the right location. We have some land upon which to develop, so we would be very interested in collaborating with Aldi on projects like this.’
Another investor open to food retail/resi hybrids is New York-based real estate group Madison International Realty, which acquired Berlin’s Sony Center in partnership with Canada’s Oxford Properties for €1.1b last October. ‘We would certainly look at this,’ Ron Dickerman, president and founder of Madison, told REFIRE. ‘Grocery stores tend to be a draw, so adding apartments is not crazy. Also, Europe is in a pretty solid growth mode and Germany is leading the pack. We’re looking for larger opportunities to invest capital there.’
Aldi’s move into the residential space highlights ‘the lengths they will go to in order to get the sites they want’, said John Wilkinson, CEO of fund manager Greenman Investments. ‘We’re already buying retail in C and D cities,’ he said. ‘We look at local demographics and what the population is expected to be in 10 years’ time. ‘It can be slow to get building permits, though, which makes it hard for retailers to expand aggressively. As a result, they are becoming more creative, hence Aldi building apartments in Berlin.’
However, how successful Aldi is will depend on the group’s exit strategy, according to Gunnar Herm, head of real estate research and strategy – Europe at UBS Real Estate. ‘Will they pull down existing stores and replace them with more modern ones with apartments? It would make sense for traditional food retailers to do this, too, given that they tend to be in strong urban locations, and local councils would be supportive of the new housing opportunities. I think there would be immediate interest if they started making these available to investors – it’s definitely a type of product that institutional investors like us would be interested in.’
German fund manager Arbireo Capital is also eyeing Aldi’s development plans with interest: ‘This could mark the beginning of a new product in the market,’ the group’s CEO, Dr. Martin Leinemann, told REFIRE. ‘This would appeal to us as investors. Equally, given the relative lack of affordable hospitality in Germany, we could see supermarkets with a hospitality component above.’ Another option would be to tear down older supermarkets and to rebuild them with a residential or hospitality element, according to Leinemann. ‘I think this product will become more popular. McDreams is doing this in the ‘Big 7’ and elsewhere, with food retail on the ground floor and hospitality above. We and our investors would like to get a chance to do this.’
Competition for co-working spaces on the up
Another option is to invest is in offices – ‘not classic offices but exotic co-working spaces’, Khorrami told REFIRE. ‘Companies want more flexibility and services, without having to be tied into 10-year contracts. There’s a lot of competition for co-working spaces because you can transform an office property with a 3% yield into one with a 10% yield. Some companies will cease to do business if they don’t want to take on more risk. The market is changing.’
Cities such as London may be leading the way when it comes to shared workspaces but Berlin is busy playing catch up. Last year, around 75,000 sqm of co-working space were leased there, more than a five-fold increase on the 14,000 sqm leased the previous year, according to C&W. The city’s popularity with start-ups - which thrive on low cost, low risk flexible spaces – is also boosting interest. WeWork is also expected to significantly increase the space it takes in Berlin.
Ultimately, ‘investors have to go to non-core assets or invest more broadly if they want better returns’, according to Dr. Jan Linsin, head of research at CBRE Germany. ‘They also need to look more at secondary and tertiary markets – your typical ABBA story,’ he told REFIRE.
Linsin also expects investment in co-working spaces to be a trend in the occupier/leasing market this year. ‘It now accounts for 7% of the office market in the ‘Top 5’ markets from virtually zero a couple of years ago.’
Not all investors are swayed by co-working, though. ‘Co-working spaces continue to garner a lot of interest from both occupiers and investors,’ said Justin Curlow, global head of research and strategy at AXA IM - Real Assets. ‘I think we’ll probably see a market evolution whereby more cities have a greater degree of these spaces. However, they also create an asset liability mismatch if you have a long lease on a building let to short-term tenants.’
Complex deals gaining ground
For other investors, flying under the radar to home in on complex deals is the key to sourcing good opportunities. ‘We can fly under the radar of the bigger institutional players to land smaller deals,’ Dr. Matthias Mittermeier, managing partner at Commodus Real Estate Capital, told REFIRE. ‘The beauty of our structure is that we have an agnostic mandate. We focus on offices and have just acquired a property where we’ve managed to increase the rental income by 35% in just one month. We like the value-add segment: you mustn’t shy away from complexity.’
Commodus still sees good opportunities in the market especially below the €30m mark, according to Mittermeier. ‘Irrespective of market conditions, finding good deals is never easy. We’re prepared to take on more risk but not to lower our return expectations. The combination of being really asset-focused against a strong macro backdrop allows you to generate risk-adjusted returns in Germany that are difficult to find today in other European markets.’
In particular, Commodus is targeting units in excess of 1,000 sqm per floor, which can command a premium of 15% compared to smaller units in today’s market, Mittermeier said.
Another investor not afraid of complexity is AXA IM – Real Assets. ‘Germany is the poster child for growth following the global financial crisis,’ said Curlow. ‘Even secondary and tertiary cities have benefitted. The supply side is starting to respond and cheap debt is plentiful, which is driving investors into new types of investment. For example, we are considering mixed use schemes which add an added layer of complexity, but as always it would depend on the asset and location.’
Core assets, however, have lost their shine. ‘Given the interest rate outlook globally, we are not currently interested in investing on behalf of our clients in core assets offering wafer-thin yields, because our focus is on growing our income stream,’ Curlow said. ‘We wouldn’t categorically rule out moving up the risk curve, but we would expect adequate compensation for that risk. Too many investors are deploying capital just for the sake of it.’
For investors willing to take on more risk, there are development opportunities in offices, resi and hotels. ‘Ultra-core money from Spezialfonds, which is backed by pension funds and insurers, is also investing more in development projects because they have to – especially in this low interest rate environment where bond yields are very low,’ Linsin said.
Low returns trump high risk for many investors
Nonetheless, lower returns continue to trump additional risk for many investors. In the latest investment climate study by Union Investment, published this month, 56% of those surveyed are not willing to recalibrate their risk strategy, choosing instead to accept lower returns. However, 37% of investors said they would be willing to take on more risk for the same returns. Also, two thirds of the 151 property investors surveyed in Germany, France and the UK expected the turning point in the cycle to be reached in 2020 or later. And 36% of the investors surveyed estimate that it will be at least three years before initial returns on real estate in Europe start to rise again.
While many investors don’t want to go too far up the risk curve, taking on ‘selective’ risk is becoming more commonplace. ‘Similarly to the majority of investors, we are reluctant to take on excessive risks,’ said Monika Sujkowska, an analyst, real estate investment strategy and research, at Aviva Investors. ‘We are, however, prepared to take selective occupier, asset management and development risks in markets with strong occupier fundamentals. We aim to only invest in markets where we have deep local expertise and close relationships with developers, policymakers and occupiers on the ground. Being embedded in a market allows us to spot mispricing opportunities and make high conviction calls about opportunities that may not be on the radar of other market players.’
Around half of the investors taking part in the survey said that they do not expect to achieve their own yield targets, within a timeframe of three-to-five years. This is supported by the consistently high value placed on security by professional investors, as reflected in the results of the survey. Security remains the most important aspect of investment decisions for 30% of the interviewed investors. For 15%, liquidity is the most important factor, while return on investments heads the list for 54%, as in the previous year’s survey.
‘These findings indicate the most common ways out of the investor’s dilemma,’ said Janßen. ‘A third option between a wait-and-see attitude and excessive risk, although still a much less common choice, involves more innovation with calculable risks.’
Mega trends are also feeding into investment patterns, according to Herm: ‘Mega trends are influencing how we invest,’ he said. ‘Technology has had a huge impact on how we work and live, making data centres and urban logistics attractive.’
Whatever investors end up investing in, 2018 is expected to be another strong year for Germany’s real estate market. CBRE is forecasting around €50b in commercial real estate deals in Germany this year and another €15b in institutional grade residential transactions. Investors clamouring for deals will just have to hope that enough comes to market to satisfy their appetite. This year, it’s not just about playing the game: successful players will need to take it to a whole new level. (ssk)
